Make the most of falling interest rates by doing research, shopping around

Like the surf hitting the sand, interest rates seem to be pounded into the ground.

How much lower can they go? No one knows for sure.

At this point many savings and lending rates already stand at low levels not seen in three to five years. And recent events suggest that consumers are likely to see further cuts in many rates that affect their wallets and pocketbooks.

Just look at the interest-rate wipeout of savers. Rates on certificates are some two full percentage points lower than they were in late July.

The government hopes lower rates will jump-start the ailing economy, now in the 11th month of a recession. As a result, rates across the entire spectrum -- from short-term money-markets to long-term mortgages -- have fallen.

Here's a consensus of expert opinion -- from David Brown of Eldorado Bank, Tustin, Calif.; Jack Lemain of the Franklin Funds, San Mateo, Calif.; Lynn Birdsong of Scudder mutual funds, New York; Frazier Evans of the Colonial group of mutual funds, Boston; Earl Peattie of Mortgage News Co., Santa Ana, Calif.; and Don Phillips of the Morningstar fund-tracking firm in Chicago -- on how the consumer can ride out the waves of lower rates:

Question: Can I raise my savings yield?

Answer: Conservative investors who placed savings with bankers are getting a rude lesson in the "price" of deposit insurance -- extremely low returns. Aggressive shopping of rates can slightly turn the tide. Extending maturities won't help as much as switching institutions.

One trick is to consolidate your banking at an institution offering "tiered" rates -- higher interest for those who do lots of business with one bank. Savers can also increase cash flow by applying savings dollars against high-cost borrowings, such as credit-card debt.

Q: What about my money fund?

A: Money-market mutual funds suffer the same malady as bank accounts -- the trade-off of safety against yields that go up and down with other short-term rates.

Additionally, a crackdown by the Securities and Exchange Commission limits funds' ability to take risks. New rules ballooned the decline in fund rates because higher-risk investment had higher yields.

One cure for money fund woes are short-term bond funds, particularly those which concentrate in U.S. government-backed issues. By taking some risk of loss of principal due to interest rate swings -- a 3 percent rise in rates would cost about 6 percent of principal -- yields run up around 8 percent.

A: Extending the maturity of your fixed-income holdings from a one or two-year savings account to a 20-year government bond has its rewards. These bonds offer not only rates higher than 8 percent but the chance for significant capital appreciation if rates fall further. A 20-year bond would gain 6 percent in value on top of that handsome interest payout if rates fell one more percent. The risk is that rates reverse and rise -- a 3 percent run-up would cost a 20-year bondholder roughly a fifth of the principal.

Other bonds to consider are municipal, tax-free issues that can be purchased individually or through funds. Although the yields are lower -- 6 percent to 7 percent -- sheltering income from state and local income taxes make that return actually worth 10 percent for middle- income taxpayers.

Q: Aren't low rates good for stocks?

A: Not only do stocks offer the chance for appreciation, they also pay dividends in many cases. One measure of that yield -- dividends on the Standard & Poor's 500-stock index -- says the typical stock is yielding 3 percent.

One compromise would be utility stocks, a favorite conservative investment.

Top five utility choices, from the Franklin Utilities Fund, are Dominion Resources, Florida Progress, FPL Group, SCECorp and American Electric Power.

Q: Is there a chance rates could rise? Then what?

A: A rate reversal could happen if the predicted short recession materializes. Increased demand for goods and money from reinvigorated businesses and confident consumers could bump up rates.

Q: Should I refinance my mortgage?

A: With fixed-rate mortgages around 9.5 percent, many might want a new loan. But you'd better check the math to see how much you'll actually be saving.

One drawback is the cost of refinancing. Another problem with refinancing out of an adjustable-rate loan is that the benchmark rates that set those loans' payments have fallen almost as

rapidly as savings rates, making these loans more palatable.

Q: Why isn't my credit-card rate falling?

A: Unless you have a variable-rate card, you'll rarely find bankers willing to change these rates.